By John Bogle
This is the latest book in the Little Book Big Profits series.
As much as I'm a big fan of value investing and enjoyed the earlier books in this series (The Little Book That Beats the Market by Joel Greenblatt and The Little Book of Value Investing by Christopher Browne), John Bogle makes a very compelling argument in favor of passive investing. I have to agree with Mr. Bogle and I personally follow an "index funds plus a few stocks" philosophy. As I hone my investing skills, individual stocks will be a greater percentage of my portfolio but foe now, I'm a firm believer in index funds and ETFs.
Anyway, onwards we go...
Main point of the book:
- Beating the market before costs and expenses is a zero sum game, while
- Beating the market after costs and expenses is a loser's game
Tyranny of Costs
- On average, the typical cost of fund ownership is 3% to 3.5%.
- Assuming a 8% average return of stock market and 5.5% return on typical fund, a $10,000 investment in a index fund will grow to $469,000 while the same investment in the typical managed fund will grow to $145,000- resulting in a shortfall of $323,600!
- The real return of a typical managed fund is even worse because of higher turnover (portfolio churning) which means higher capital gains taxes for fundholders.
Are fund managers and investment advisers smarter than the average investor?
- Out of the 355 mutual funds started in 1970, only three funds, or 8/10 of 1%, have beaten the market!
- A recent study found that average return of funds recommended by advisor was 2.9%. Average return of funds selected directly by investors - 6.6%
A good rule of thumb
- Transaction costs of a fund average about 1% of the fund turnover rate. For example, a fund with 100% turnover would carry a cost of 1% of assets. This is important fact generally overlooked by fundholders since it is not disclosed by the fund companies and difficult to find.
An interesting thing about the book is that Bogle brings up Buffett and Graham as proponents of index funds while these two individuals have been called the founders of value investing! While it is true that Buffett has endorsed index funds for the "know nothing" investor, he has also said that for a "know something" investor, it makes sense to buy fractional ownership stakes (a.k.a shares) of wide-moat companies selling at reasonable prices compared to their intrinsic values.
The above issue notwithstanding, this is a great book and I recommend it to everybody.
For another excellent take on the book, check out...